Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

The EPA's new lead regulations officially went into effect on April 22.  As expected, EPA has promptly issued notice that it intends to change the regulations to remove the "opt out" provision.  The opt-out created an exemption from the regulations where a home owner certified that no child under 6 or pregnant woman occupied the home and that the home was not a child-occupied facility.  The new change will take effect 60 days after publication in the Federal Register.

The removal of the opt out provision was expected and followed a litigation challenge from various advocacy groups.  That litigation resulted in a consent settlement with EPA whereby EPA committed to propose several changes including removal of the opt-out provision.

The bigger news may be that EPA also announced its "intention to regulate the renovation, repair, and painting of public and commercial buildings[.]"   Hopefully the next wave of this roll-out will be less chaotic than the first but the track record thus far is not promising.

A special thanks for our friend Sean Lintow of SLS Construction.  Sean knows this issue inside and out and his blog has tremendous detailed technical information for those looking to delve deeper into the regulations.

Earlier posts:

Lead Paint Regulations April 22: Are You Ready?  Is Anyone??

Renovators Beware: Lead Paint Regulations Change in April

Image by endora57

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Back on April 14th I blogged about the creation and anticipated operation of the Virginia Defective Drywall Correction and Restoration Assistance Fund (the "DDCRAF") via two new provisions to the Code of Virginia patroned by Delegate Oder this session.  If you read that posting you'll recall that the purpose of the DDCRAF is to create a perpetual, non-reverting fund to facilitate the remediation of property impacted by the use of "Defective Drywall" in residential construction, and I promised to find out whether funding was lined up for the DDCRAF yet.  Delegate Oder's office has been very responsive and helpful in explaining how they envision funding to come through for the DDCRAF.

The bottom line is that there is no dedicated funding for the DDCRAF at this time.  According to Delegate Oder's office, the purpose of the legislation was to "...set up an account where money can be deposited and a process established where money can be distributed to victims of defective drywall... [and] to put Virginia in a position to be able to react immediately if/when funding comes through, either from the Federal Government or from legal settlements."  All said, Delegate Oder's office provided that the DDCRAF was "...modeled after the Brownfield Restoration Fund currently in place in Virginia."

Thus, anticipated funding would potentially come from two sources: the Federal Government and legal settlements.  At the Federal level, the funding for remediation issues is still being pursued by the Congressional Caucus on Contaminated Drywall, and the financial, health and safety impacts are still being managed and investigated by the U.S. Consumer Product Safety Commission, HUD and the EPA.  The concept of using money obtained from legal settlements is that there will need to be an independent place for this money to be deposited and managed.  So for the time being, the availability of funding is in the hands of Congress and Virginia's own Congressman Glenn Nye, chair of the Caucus on Contaminated Drywall, and his colleagues in the caucus, to do something creative this session.

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Public service is a core value in my life. Part of the fun of social media is that it gives the chance to show the wizard behind the curtain a bit and exhibit the personality and values that drive you. This is a little oblique to construction law, but ultimately these topics intertwine for me in professionalism and community building.

One of the fun parts of being a professional is having the chance to be inspired and awed by the public service commitments of our friends and colleagues. A great example of this is the Architects Anonymous group here in Northern Virginia. Our friend Rae Noritake of Noritake Associates described their pro bono efforts to adapt the Four Mile Run Duron Paint Store into a functional community oriented space. The project not only represents a tremendous potential community improvement, but it also embodies the spirit of dedicated servant leadership stepping up to the plate and transforming the community. The project has been moving through the approval process and will hopefully continue its progress.

Sometimes the chance to serve a cause directly in one's professional capacity erupts on the landscape. A good example of this effort in a professional capacity is the dogged efforts of both MTFA Architecture, Inc. and Bean, Kinney & Korman to support the Views at Clarendon project from its infancy through its various waves of litigation and finally on through funding at the start of construction. It is special when you can link your professional work to community transformation, such as supporting a significant affordable housing project like the Views.

There are plenty of other opportunities outside the direct case and client work. For me, one of my main outlets right now is supporting the various substance abuse programs run by Vanguard Services Unlimited. There is nothing more inspiring than hearing program graduates recount how Vanguard changed the arc of their life from misery to success. Arlington in particular is blessed by a large number of great non-profit organizations. I have been proud to support and volunteer in various capacities for Arlington Food Assistance Center, the Arlington Free Clinic, Leadership Arlington, the Arlington Chamber of Commerce and many others.

The best part of all is that being part of the community fabric is part and parcel with being an effective professional. Whether it is an architect or lawyer advocating for a project, knowing the community and having credibility are part and parcel of being effective. The relationships forged through shared work, vision and mission on community building are truly special.

What are you doing to change your world?

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In the first part of this posting, we reviewed the deed in lieu process, and how it can be a viable alternative for both the lender and the borrower in situations of serious default where modifications or workouts are impossible. In this second part, we will discuss briefly some important tax and bankruptcy considerations.

Tax Issues

A borrower considering the possibility of foreclosure or a deed-in-lieu of foreclosure should be aware that these events can lead to income taxation of capital gain or cancellation of indebtedness income. The tax results depend in large part on whether the loan is a “recourse” loan or a “non-recourse” loan.  A non-recourse loan is one where the lender’s sole option for recovering on the loan is to take back the property. If the lender can pursue the borrower personally for any shortfall by obtaining a deficiency judgment, then it is a recourse loan.

In the case of a non-recourse loan, the conveyance is taxed as if it were sold for the greater of the outstanding debt or the sales price.  The nature of the gain and the deductibility of any loss depends on the holding period and the nature of the property. 

In the case of a recourse loan, in addition to the potential income and gain resulting from the sale for value, there also may be cancellation of indebtedness income if the debt exceeds the value of the property. Cancellation of indebtedness income is taxed at ordinary income rates, but there are several temporary exceptions. For example, you can exclude cancellation of indebtedness income if the debt is discharged in bankruptcy, to the extent the borrower is insolvent, or in certain situations related to qualified real property business indebtedness. Note that the exception for real property business indebtedness is generally available for rental real estate and other income-producing property, but typically is not available for property held for sale such as a residential development.

Lastly, note that for non-commercial properties, the Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.

Bankruptcy Issues

If the borrower afterwards files for bankruptcy, then in certain circumstances the conveyance of the property back to the lender could be disallowed. The two main issues to be concerned about with respect to bankruptcy after a deed-in-lieu are preferential transfers and fraudulent conveyances.

Section 548 of the Bankruptcy Code provides that fraudulent conveyances may be set aside if made within the statutorily proscribed timeframes. To be deemed fraudulent, a transfer must be made for less than the reasonable equivalent value and if the borrower meets certain tests of insolvency.

Under Section 547 of the Bankruptcy Code, preferential transfers within ninety days of the date of bankruptcy filing may be set aside. Further, preferential transfers from insiders who had reasonable cause to believe the debtor was insolvent may be set aside if it is made between ninety days and one years prior to the date of filing of the bankruptcy petition. A preferential transfer is a transfer from an insolvent debtor that is made for the benefit of a creditor, providing the creditor to receive more than it would have received in a Chapter 7 liquidation if the transfer had not been made. To prevent the transfer from being voided by the bankruptcy trustee, the lender must show that the lender did not receive more than it would have been entitled to under a Chapter 7 liquidation because the fair market value of the property conveyed is less than the outstanding indebtedness owed to the lender. 

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The Virginia Supreme Court was busy last week, issuing eighteen opinions, two of which – Bailey v. Town of Saltville and Schefer v. City County of the City of Falls Church – were highlighted in the post late last year, Case Watch: Upcoming Virginia Supreme Court Opinions.

Bailey looked at whether a 1909 agreement and a deed concerning a railroad right of way conveyed only an easement or a fee simple interest. In 1909, James and Kate White recorded an agreement and a deed conveying a right of way to Norfolk and Western Railway Company. The agreement's stated purpose was to resolve a dispute over the width of Norfolk and Western’s right of way, and said that the Whites were conveying an eighty-foot wide right of way through their farm. The deed, executed the same day as the agreement, said that the Whites were granting and conveying a strip or parcel of land, described by metes and bounds, with a total acreage of 20.59 acres, setting out survey calls with bearings and distances for the centerline of the track. The deed ended with a covenant that the Whites “will warrant generally the land hereby conveyed.”

In 1993, Norfolk and Western abandoned the railroad line. In 1994, Norfolk and Western donated the railroad corridor to the Town of Saltville by way of quitclaim deed. In 2002, Bailey acquired title to a portion of the farm through which the old railroad line passed. In 2004, Saltville began removing the railroad tracks from the corridor. In response, Bailey posted “no trespassing” signs and denied Saltville entry to the corridor, prompting the town to file suit.

The Virginia Supreme Court began with the basic rule of giving the words used in the deed and agreement their natural and ordinary meaning. It also cited the rule that when two documents are executed at the same time and refer to the same topic, the documents are part of one transaction and are construed as if the provisions were from one whole document. To determine the intent of the parties, the Court looked at the deed’s language, including the language that described the conveyance of “all that certain strip or parcel of land” and warranting generally “the land hereby conveyed.” The Court sided with the Town of Saltville, concluding that the Whites had transferred complete ownership -- a fee simple interest, not a mere easement -- to Norfolk & Western.

The lesson to be learned from this case is – Say What You Mean! In any deed, be sure to spell out exactly what kind of interest you intend to convey. If you mean to convey a fee simple interest, then say so. If you mean to convey only an easement, then say so. [Don’t forget the lessons from Details, Details, Details: What it takes to convey an easement in Virginia and Details, Details, Details, continued: When 1 + 1 still equals 1!]

Also remember that if you are executing other documents along with a deed, make sure that all of the documents are consistent in spelling out exactly what the parties mean to do. The confusion in this case stemmed from the parties having executed two different documents, neither of which spelled out fully what the parties intended. Don’t leave the decision of what you intended to the court. It is much more time effective and much less expensive for you to say right in the documents exactly what you mean!

Bailey wasn’t the only easement related case decided on April 15. The Virginia Supreme Court issued two other opinions regarding easements. In Hafner v. Hansen, the Court concluded that there was no easement by prescription for an unrecorded underground sewer line. Although the neighbor continuously used the sewer line, the line was not so open and obvious that the owner should have known about it and objected to its use.

In Snead v. C&S Properties Holding Company Ltd, the owner installed a chain-link fence, trees and shrubs, signage and rip-rap along an easement. The trial court refused to issue an injunction because there was still enough room for a car to pass, allowing the holder of the easement access to his property. The Virginia Supreme Court reversed, saying that an injunction barring encroachment on the full width of the easement was the right outcome.

Stay tuned for the outcome of the second case, Schefer v. City Council of the City of Falls Church, in a post coming soon!
 

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We are very pleased to have a post today from one of our colleagues here at Bean, Kinney & Korman that focuses his practice on real estate related matters, John Kelly.  We are looking forward to John's contributions here on the blog moving forward and believe John may become a regular mainstay here shortly!

Given the present economic climate, it is no surprise that many real estate developers are having difficulty paying back their lenders. The lender may agree to waive the existing defaults and restructure the loan by modifying the terms of the loan or adding additional collateral or the lender may instead proceed immediately to foreclosure. After conducting its distressed loan due diligence, however, the lender may determine that neither extreme is the right choice. Restructuring the loan may be impractical given that economic circumstances make foreclosure inevitable, but the lender may want to avoid the expense and time needed to foreclose. This post will discuss in detail the compromise position where the borrower averts foreclosure by agreeing to convey the property back to the lender via a deed-in-lieu-of-foreclosure, typically in exchange for the cancellation of the indebtedness. This will be a two part series, with the first part discussing the key aspects of a deed-in-lieu transaction, and the second part of this post will review in brief the related tax and bankruptcy issues.

The main advantage offered to both the borrower and lender is that a deed in lieu avoids the cost, time and negative stigma of a drawn-out and contested foreclosure action. For the lender, they can quickly and efficiently take over the operation of the project and preserve existing leases and contracts. For the borrower, they can obtain a release of their personal liability.

To preserve the validity of the transfer of the property to the lender, it is very important that the conveyance was made voluntarily and for adequate consideration. Lenders will want to protect themselves from the borrower later arguing that they were subject to duress, undue pressure or fraud in an effort to overturn the transaction. With regard to adequate consideration, the lender typically will not accept the conveyance unless the fair market value of the property is close to the amount of the indebtedness and the property can be obtained for less than the total cost of a foreclosure. To make clear that the transfer was voluntarily, the borrower should first submit a written offer to the lender offering to convey the property to the lender with outlining the terms and conditions of the offer. The lender should in turn reply to the borrower’s offer in writing, providing a list of conditions under which it will accept a deed in lieu. With respect to the adequacy of the consideration, the lender and borrower should self-servingly provide in an agreement that the current value of the property is equal to or less than the outstanding indebtedness. Lastly, as part of its due diligence, the lender should order an appraisal of the property, along with a title search and environmental study.

Usually, the agreement would also preserve the lender’s first lien on the property. This give the lender the right to later proceed with a regular foreclosure in order to wipe out any junior lienholders and clear title as needed. To preserve this right, the agreement should make clear the intent of the parties for the lien to remain separate even though the lender would then be the owner of the property as well as the holder of the mortgage lien. Another method of dealing with these anti-merger concerns is to have the lender take title to the property in a related entity.

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At the risk of engaging in a bit of direct self-promotion for perhaps the first time, today we have a guest post from Raighne Delaney, a shareholder of Bean, Kinney & Korman, P.C. and lead counsel in the successful dismissal of a case on April 12, 2010 pending against the Views at Clarendon Corporation, Inc. involving an affordable housing project here in Arlington. Raighne’s comments regarding the case follow:

On April 12, 2010, Judge Hilton of the U.S. District Court for the Eastern District of Virginia dismissed a suit seeking to halt the Views at Clarendon affordable housing project in Arlington, Virginia. The plaintiff, Peter Glassman, claimed the project violated the U.S. and Virginia Constitutions’ establishment clause by allegedly using Arlington County government funds to erect and repair a church and support the church’s ministry. The court roundly disagreed with these allegations, finding that the plaintiff’s complaint failed to properly allege an Establishment Clause case. The court granted the various defendants motions to dismiss as to all counts of the case with prejudice and no leave to amend was granted.

The project, known as the Views at Clarendon, is being constructed on property formerly owned by the First Baptist Church of Clarendon (“FBCC”). In 2003, the FBCC decided to develop its property located one block from the Clarendon metro stop. Rather than sell the property, the FBCC felt that the best use for the site was to erect a ten story building, of which the first two floors would consist of a church sanctuary. The building’s remaining eight floors were designed as affordable housing.
Neighbors raised vocal objections to the project through typical Arlington County entitlement processes and extending into multiple iterations of litigation. After losing their case at the trial court level in the initial litigation, in 2006, various neighbors prevailed in challenging the County’s initial rezoning of the property. The County corrected the zoning procedural issues and again approved the project. The zoning approval eventually survived legal challenge. This latest Establishment Clause case was thus the fourth separate lawsuit filed by nearby property owners using various legal means to challenge this affordable housing project.

However, the suit failed because there is the FBCC, which is building the church sanctuary, and the Views at Clarendon Corporation (“Views”) which is constructing the residential units. The FBCC created the Views as a separate secular non-profit entity. Once created, the Views runs as a separate entity and the FBCC has no further involvement or control over the Views. For a variety of economic reasons, the secular and separate Views entity decided to create a new limited partnership, 1210 North Highland-Clarendon, LP (“1210 NHCLP”), and became 1210 NHCLP’s general partner.

FBCC entered into an arms-length transaction to sell the entire property for $5.6 million to 1210 NHCLP, a price well below the full value $14 million appraisal for the property. Arlington County lent $13.1 million to 1210 NHCLP, the Virginia Housing Development Authority (“VHDA”) lent $14.5 million to 1210 NHCLP, and 1210 NHCLP received an $18.6 million federal grant, collectively for use by 1210 NHCLP in the property acquisition and in construction of the residential units, though some of the funds had designated purposes.

When finished, the building will consist of two condominiums. Condominium A will consist of the former church steeple and the first two floors of the 10 story building for use as a church sanctuary. Condominium B will consist of the underground parking and the third through tenth floors of the 10 story building. The funding for the FBCC project (Condominium A) and the separate affordable housing project (Condominium B) are strictly separated. Not one penny of Arlington County’s money is being used by anyone to pay for the construction of Condominium A.

To access their apartments, future residents will not step onto the church’s land, and will use their own entrance, not the church’s entrance. Furthermore, the condominium rules and state regulations prohibit any religious indoctrination of residents. The FBCC will have zero control over the selection and retention of Condominium B’s residents. Furthermore, the Views’ has contracted with a private management company to run that process.

Ultimately, the court ruled that Arlington’s loan was for the secular purpose of providing affordable housing in Arlington. The judge further found that there was “no factual allegation” of religious indoctrination that would allow for the case to move forward. The court expressly found that the separate entities, their creation, their structure, and their membership created “no legal infirmity.” Finally, the court ruled that the funds received by the FBCC when it sold the property to 1210 NHCLP were not related to the FBCC’s status as a religious entity because a church can sell its property like any other person. We are very pleased as a firm that this exciting and important project is moving forward, particularly after prevailing in the face of repeated oppositions, lawsuit and challenges.

Those interested in learning more about the Views at Clarendon project may wish to visit DC Mud’s previous posts from October 2009 and December 2008.

Image courtesy of MTFA Architecture, Inc.

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We've got two new provisions to the Code of Virginia as of this last legislative session which create a perpetual, non-reverting fund to facilitate the remediation of property impacted by the use of "Defective Drywall" in residential construction.  This fund will be administered by the Virginia Resources Authority and the Department of Housing and Community Development ("DHCD"). 

According to the bill's summary, the DHCD will "...develop guidelines for the distribution of loans or grants from the Fund to particular recipients. The grants and loans may be used to pay the reasonable and necessary costs associated with: (i) the remediation of a contaminated property to remove hazardous substances, hazardous wastes, or solid wastes, ( ii) the stabilization or restoration of such structures, or (iii) the demolition and removal of the existing structures or other work necessary to remediate or reuse the real property" due to the effects of "Defective Drywall." Kind of makes you nostalgic for underground storage tanks, doesn't it?

So what is considered "Defective Drywall?"  Well, it's defined at length in the bill's definitions section, so I won't bore you with all the details, but basically it must have been installed during new construction or renovation between 2001 and 2008 and meet the technical requirements of the definition (i.e. sufficient strontium, sulfur or hydrogen sulfide levels, etc.). 

Who can receive loans and/or grants from the fund?  Eligible entities for grants appear to only include local governments (who appear to be able to then use these grants to create incentives for remediation), while loans may also be made to local governments, public authorities, corporations, partnerships, or individuals for the remediation purposes.  The Virginia Resources Authority will get to determine the rates.

So the legislation is in place creating the fund.  What I've learned about government funds though, is that the most important question about any fund is: Is it funded?  Well, I don't know yet.  But I did shoot the bill's patron,  Delegate Oder, an email to see if he could shed any light on how the fund will actually operate for us - we'll let you know when we hear back.

Want to know more about Chinese and other defective drywall from a product liability standpoint?  Check out Tim Hughes' string of posts here.

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I spent this weekend thinking about the significant victory for Virginia home owners in the Chinese drywall litigation that was tried as part of the pending class action in New Orleans.  It may have mattered quite a bit that this ruling was issued in New Orleans as opposed to Virginia. 

I run the risk of delving into legal complexity, but it is necessary here to understand these issues.  We have talked about the economic loss rule several times here, in particular as it relates to products liability cases, and implications of classifying damages in such cases.  Those interested in design and construction issues in Virginia absolutely need to understand the economic loss rule.  The contours of this rule define who can whom and for what.  This rule is heavily briefed, argued, and litigated and can mean the difference between a big payday and a big goose egg.

It is clear in the Chinese drywall case that the home owners purchased a single unitary home from various builders and that one part of the home (the drywall) damaged others (piping, wiring, HVAC, et c).  There is a strong argument these cases fall under the clear mandate of the seminal Virginia case on this topic, Sensenbrenner v. Rust, Orling & Neale.  At least as to the home repair issues, the Sensenbrenner case would potentially eliminate all of the negligence based property damage theories of recovery for home repairs.

The remaining theories of recovery against remote manufacturers would be for breach of UCC warranties.  The next layer of analysis would be to evaluate whether the repair costs claimed are direct damages or whether they were consequential damages requiring privity of contract that are thus barred.  The products cases in Virginia have stuck to the statutory measure of direct damages which is the difference of the value of the product as warranted versus as delivered.

Reading the court's opinion issued last week in the drywall case, the court never discussed any of these issues.  The court discusses Virginia law, property damage, and recoverable measures of damages for property damages at length.  The economic loss rule is never mentioned, nor is the Sensenbrenner case, nor is the UCC line of cases on direct versus consequential damages.  Reviewing the cases and our previous posts, this case may have turned out very differently if tried in a Virginia court.

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As reported today by Virginia Lawyer's Weekly, seven Virginia families were awarded $2.6 million in damages by New Orleans federal Judge Eldon Fallon.  The whopping verdict allowed recovery of extensive damages, but denied recovery due to loss of value stigma damages to the homes in question.  In addition the opinion contains a number of interesting points and wrinkles that are worth highlighting.

1. The case was tried by default against the defendants.  A number of other interested parties initially intervened, then dropped back out of the case.
2. The case issued extensive scientific findings regarding problems with Chinese drywall (pp. 12-16); time will tell how much portability this court's factual findings have, particularly in light of the empty defense table.  The court's opinion suggests there was defense expert information presented for consideration by the intervenors.
3. The plaintiffs were able to convince the court that the drywall caused their home to be classified as a "severe industrial corrosive environment" (pp. 20-21) ... not exactly the place you want to raise your kids!
4. The court found that even in homes with mixed Chinese and non-Chinese drywall, all drywall needed to be removed.  This was both more efficient and eliminated identification problems.
5. Similarly, the court found that all electrical wire, copper piping, HVAC units, and extensive numbers of electrical equipment and appliances needed to be removed and replaced. 
6. Carpet, hardwood flooring, counter-tops, bathroom fixtures, trim, insulation, and cabinets need to be replaced; tile flooring that is damaged during remediation would also need to be replaced.
7. Post remediation, HEPA filtering and independent testing and certification is required.
8. The court calculated the remediation cost average at $86 per square foot.
9. The court analyzed each home owner's situation and awarded damages for repair costs, loss of personal property, economic losses caused by the disruption (such as foreclosure and bankruptcies), alternative living arrangements, and loss of use of the homes and personal property.
10. The court found that stigma loss of value damages were speculative and that the situation was repairable.  As such, the court refused to award damages on this point.

This is a very significant verdict.  It remains to be seen how the plaintiffs will covert this verdict into recovering actual dollars.

Image by xxandyshredxx

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I had the pleasure and privilege of testifying as an expert witness in a case last week.  I have been retained as an expert a number of times and have now been qualified as such in two court proceedings and an arbitration hearing.  It is fascinating how the view of the courtroom changes depending on what seat you occupy.

In each case I have been retained, the lawyers have been particularly experienced, well qualified, and extremely well prepared.  Each case involved fairly detailed records and pleading review and analysis, interviews and sifting through significant information to develop an opinion in a relatively compressed time frame.  In each instance, the lawyers rapidly gathered everything I asked for and transmitted it timely and promptly.  I never got jumped with anything unexpected or unusual.  By the same token, when I have had these engagements, I have been prompt to point counsel to the totality of my practice, background, and publications so they were not surprised either.

Without getting into case details, there was one moment that was particularly educational.  I had been qualified on one topic by stipulation, but my ability to comment on another was challenged.  Counsel used some background facts that we had talked about in another context to ask an inspired softball question that came up spur of the moment.  Sitting in the witness box, it was like watching a slow pitch over the plate and ripping it.  While it is unclear what will happen in the case, I was admitted as an expert on all the proffered topics.

The experience of sitting in the witness box a number of time yields some important lessons for when I move back to counsel table:

• Be prepared
• Get your witness prepared
• Give your experts the materials they need
• Get them the materials when they need them
• Try to ensure your experts are truly conversant with the case so that rather than being scripted and robotic, they are instead conversational and able to react to opportunities or challenges on the fly
• Listen!  Listen to your clients and witnesses outside the courtroom.  Listen inside the courtroom.  Get out of your own head and into the moment, that is how you get the chance for taking that fact and turning it into the perfect question and answer for the moment during trial

Image courtesy of Science Education Resource Center at Carleton College

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 Earlier this year, Judge Bellows of the Circuit Court for Fairfax County found that repairing and replacing exterior building components including terrace soffits did not constitute an “improvement” for purposes of Virginia’s statute of repose. Now another court has limited what can constitute an “improvement” under Virginia’s mechanics’ lien statute.

In Summit Community Bank v. Blue Ridge Shadows Hotel & Conference Center, LLC, et al., Civil Action No. 5:10-CV-00005, Judge Conrad of the United States District Court for the Western District of Virginia (Harrisonburg Division) was confronted with whether furnishings including sleeper sofas, chairs, lamps, tables and art prints were properly claimed as “improvements” in a mechanics' lien under Virginia Code Section 43-3.

Judge Conrad began by pointing out that the General Assembly has failed to define the word term “improvement” in Virginia’s mechanics’ lien statute. Looking at Subsection A of Section 43-3, a mechanics’ lien is available for materials used in the “construction, removal, repair or improvement” of “any building or structure.” Judge Conrad reasoned that the “construction, removal, or repair of a building each results in a change to the actual building, not simply the building’s potential use or function,” and theorized that there must be a

greater connection between the materials furnished to improve the building or structure, and the building or structure itself. In other words, it is not sufficient for materials to simply add value to a building by their mere presence without any further connection to the building.

Judge Conrad concluded that a mechanics’ lien was not appropriate for the furniture at issue because the furniture had no real connection to the building itself other than its mere presence.

In reaching this conclusion, Judge Conrad had to grapple with a Virginia Supreme Court case, Moore & Moore General Contractors, Inc. v. Basepoint, Inc., 253 Va. 304, 485 S.E.2d 131 (1997). In Basepoint, the Virginia Supreme Court ruled that cabinets that had been installed and later removed from the building were properly the subject of a mechanics’ lien. Judge Conrad focused on the fact that the Virginia Supreme Court in Basepoint found that the cabinets, although removable, had initially been “installed and added value to the structure” itself. Therefore, the cabinets had actually been incorporated into the building. By contrast, the furniture in Summit Community Bank was not intended to be, and had not been, installed or incorporated into the building.

This is yet another lesson learned in the world of Virginia mechanics’ liens. Mechanics’ liens are an incredibly convenient way to recover costs, but the Virginia’s mechanics’ lien statute is a landmine for the unwary. And this is not only due to what kinds of materials will support a mechanics’ lien. Even more important are the very strict deadlines and procedures you must follow to properly file a mechanics’ lien. When in doubt, get advice right away!

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Our blog has been inundated with hits on our two blog posts regarding the EPA's new lead paint regulations, Renovators Beware: Lead Paint Regulations Change in April and Lead Paint Regulations April 22: Are You Ready?.  We have fielded a number of questions from folks looking for information on classes and certification with the EPA.

I thought it would be helpful to provide a link where you can sign up for such training with The Training Network.  Just click on schedule of classes for information on specific dates and locations.  I would encourage folks to consider signing up for the classes held in Chantilly by the Northern Virginia Building Industry Association.  We are very active with that organization and they are doing excellent training and advocacy work for the home building industry.

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I just received an interesting and exciting e-mail I wanted to share with our readers.  Our friend Matt Handal has been involved with creating an iPhone application for the architecture, engineering and construction industries to share information and links.  He just passed along this note to me:

Dear Tim

As a courtesy, I wanted to let you know that your blog posts are now available to iPhone and iPad users through the AEC Info iPhone App. This is a free iPhone/iPad app available in the iTunes store. Your content is located under the Law category.

Users can read your posts, send them through email, share them on Twitter, and open your website up in the Iphone/iPad web browser (Safari). The app has been very well received and this should open up a whole new set of readers to you and your website. Go to http://www.aeciphoneapp.com to learn more.

The app offers the latest industry headlines and insight from across the web. All from one convenient mobile application. We selected your blog posts as important to the industry and therefore included them in the app.

Thanks for including us Matt, and best of luck with your new application!

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Our friend Matt Morse at Dovetail Construction had a great post on Friday entitled "Sometimes Things Go Wrong".  Matt makes some excellent points that even the best builders will face some problems -- the way a builder responds to those problems presents an opportunity to stand up, take responsibility, and potentially turn a "customer" into an "evangelist".

Those facing a potential confrontation need to keep in mind the cost, time and stress involved with court cases.  It generally is far better to work a situation out amicably, the earlier the better, than to get into a protracted fight.  As Matt said in his post, "Sure, it often costs money not to hide behind a contract or other document, but what is the cost of not getting referral business from that customer?"  The reality is that even with a great position, great facts, and a great contract, it is still going to be expensive, time-consuming and stressful to get involved in litigation.  No matter how good you think your case is, there is risk.

Psychology, personalities and relationships play a huge part in the dynamic of communication and its breakdown.  As Seth Godin very accurately described on his blog, the question generally comes down to whether we give people the benefit of the doubt ... a question which turns inherently on whether we trust someone.  To Seth Godin, "The challenge, then, is to earn the benefit of the doubt."

Builders facing these questions need to keep them front and center to avoid friction and conflict.  Stepping up and taking responsibility where appropriate is the direct path to earning the benefit of the doubt on construction projects.  It is great advice for any business, but especially in the construction industry where there is so much complexity and room for misunderstanding and problems.

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The official word is now circulating that GBCI and USGBC are dramatically altering the inspection and certification process for LEED certifications.  Last week, I posted the very surprising information that major changes were potentially in the works for GBCI certifications based on a comment at a seminar I attended.  GBCI's initial comments on the blog post appeared to reflect that the initial information was slightly off, but the thrust of problems and resulting changes to the third party inspection protocol appeared accurate.

I received a report from a good friend of ours, Jerry Therrien of Therrien Waddell Construction, that USGBC Maryland has circulated the following official announcement under the tag line, "GBCI Certification Process Evolving":

GBCI concluded its evaluation of the 'pilot' in which global certification bodies were engaged to assist with LEED project certification. The expectation was that this model would improve capacity and allow GBCI to scale the certification process while maintaining the necessary rigor and level of customer support. What GBCI discovered, however, was that it put too much distance between GBCI and its customers and hampered efforts to provide the clarity and consistency that project teams need to complete the certification process.  

Given this, GBCI will gradually assume direct management of certification reviews over the next two years. This change should be seamless to project teams. GBCI will use a combination of staff reviewers and contracted review teams to keep certifications flowing through the pipeline during the transition.

I have two editorial reactions to this.  First, after pushing the outside inspection regime so vocally only a year ago, this change represents a major shift in direction.  My initial reaction continues to be if it is not broke, why fix it?  There clearly must be widespead and significant problems with third party credit reviews to dramtically reverse course like this.  I have heard some very limited grousing in this direction about issues, but nothing too significant to force a change like this.  Perhaps our clients and friends have been lucky.

My second reaction is to say kudos and great job.  It takes a lot of organizational guts to recognize a  problem and step up and fix it even if it means completely reversing direction.  It was a bold initial move and it is a bold course correction.  The cavitation is perhaps a little disconcerting, but I for one would rather have organizations making the best decisions based on the best information boldly instead of sitting around and doing nothing when faced with problems.  That is what leadership is all about.  

Image by jeffmcneill

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